The rotation between Value versus Growth stocks continued during the month, with Growth outperforming Value this time. The MSCI World Growth Index was up 3.3% for August while MSCI World Value Index was up 1.7%. Despite the spread of the Delta variant and other pandemic-related challenges, August saw US equities reaching new highs again. Volatility also decreased this month. The CBOE Volatility Index (VIX)- which measures the stock market’s expectation of volatility- decreased as the month ended, from a high of 24.7 mid-August to 16.7. This lower volatility could have contributed to investors moving to more risky investments.
One of the most anticipated events for August was the Jackson Hole Symposium. Jackson Hole is an annual U.S. symposium which focuses on economic policies and this year’s tile was “Macroeconomic Policy in an Uneven Economy”. Overall, market concerns over the outcome of the symposium were put to rest by the Federal Reserve’s Chairman, Jerome Powell, who was broadly perceived to be dovish in terms of the Fed’s stance on tapering. The Fed stated that “provided that the economy were to evolve broadly as they anticipated, they judged that it could be appropriate to start reducing the pace of asset purchases this year." Powell’s commentary boosted equities up. He emphasized that the economy would be supported “for as long as it is needed to achieve full recovery”. He suggested that tapering may start at the end of the year only if “substantial further progress” on inflation measures cooperate and employment numbers are achieved.
Chinese equities were flat this month due to China’s regulatory crackdown. The increased regulation could result in some companies reassessing their business models and strategies.
European equities had gains this month due to their second-quarter earnings season positive results as well as the economic recovery from the pandemic- c.70% of the population in the large eurozone countries have been vaccinated. Best European performers were the information technology, communication services and utilities sector. The worst performers was consumer discretionary- as the market thinks that the Chinese government may want more wealth redistribution which could negatively impact luxury goods- and consumer staples.
The best performing U.S. sectors were financials, communications and utilities. The worst performing sectors were energy- crude oil and brent crude saw a sharp decline in prices- and industrials.
Risk management continues to be embedded in our investment process as there’s still a lot of uncertainty in the market. Is inflation really temporary? Will growth falter? There’s still concerns about the spread of the Delta variant which will also impact the markets. The Fed’s timing of the tapering will also increase volatility. Good companies that can grow independently from economic activity should outperform the market in the long-run.